Retailers Seek Shipping Savings Amidst Consumer Demand for Speed
The race for speed in package delivery, reaching its peak with same-day shipping, has left retailers struggling to manage transportation costs. A new survey from global consulting firm AlixPartners reveals the mounting pressure on retailers as they navigate the increasing competition among shippers for retail volume in a market dominated by FedEx and UPS.
Key Takeaways:
- Consumers expect same-day delivery, but retailers aren’t seeing the financial payoff.
- Delivery costs on a per-package basis are rising, leading to a greater emphasis on cost reduction strategies.
- Retailers are diversifying their last-mile delivery options, moving away from sole reliance on FedEx and UPS.
- Amazon rivals Shein and Temu are impacting the market, contributing to UPS’ recent financial struggles.
- Free delivery remains crucial for consumers, but expectations around delivery times are tightening.
Rising Delivery Costs and Consumer Expectations
Retail executives are facing a double-edged sword: consumers demand faster delivery, but the financial strain of meeting those demands is growing. The AlixPartners survey revealed that 76% of executives reported increased per-package delivery costs since last year. A significant majority (85%) expressed that reducing total cost per order is their top priority for last-mile delivery.
“Carriers have experienced meaningful inflation in wages, equipment, repair and maintenance, insurance, fuel, tires, real estate, healthcare costs, and more,” remarked Marc Iampieri, global co-leader of logistics & transportation at AlixPartners. “Those costs are offset by future rate increases. There is also a macro supply-and-demand equation to consider as e-commerce growth outstrips retail growth.”
The recent UPS-Teamsters contract renewal is a prime example of wage inflation impacting carriers.
Shifting to Multi-Carrier Strategies and Alternative Providers
Faced with rising costs, retailers are actively seeking to diversify their last-mile delivery solutions. Three out of four executives surveyed indicated they utilize a mix of last-mile options. This strategic shift has been beneficial for FedEx, with 42% of executives citing them as the primary last-mile carrier, up 15% year-over-year. In contrast, UPS experienced a decrease, dropping from 35% in 2023 to 25% in 2024 as the primary last-mile carrier.
Two out of five retailers reported shifting volume away from FedEx or UPS to alternative providers in the past year.
The Rise of Alternative Providers and the Impact of New Market Entrants
Among the alternative parcel delivery companies benefiting from this move toward diversification are OnTrac, Pandion, LSO/Lone Star Overnight, Uber Eats, Uber Connect, Postmates, DoorDash, Instacart, and Shipt.
UPS’ recent earnings report shed light on the growing impact of new market entrants, notably Asian low-cost retailers Shein and Temu. UPS highlighted that customers are "trading down" to more economical options and that these new entrants have contributed to customer loss year-over-year.
Free Delivery Remains a Priority, But Expectations Are Tightening
While free delivery remains a significant factor in consumers’ buying decisions (92%), their patience is wearing thin. The consumer threshold for waiting for delivery is now a maximum of 3.5 days; any longer, and shoppers will seek out alternative retailers.
To manage this, retailers are adjusting their policies, leading to an increase in minimum order spend for free shipping. Over 64% of surveyed retailers have raised their minimum order value for free shipping, while 15% now require both a minimum order value and membership for free shipping.
The Rise of BOPIS and the Increasing Importance of Returns Management
Consumers are also turning to Buy Online, Pick Up in Store (BOPIS) as a means to avoid delivery fees and receive products faster.
Retailers are also implementing strategies to reduce the costs associated with returns. To achieve this, they are refining their return policies, including:
- Shortening or enforcing the return window of time.
- Eliminating free returns solely for convenience.
- Requiring a stated defect or issue with the returned good.
Over 80% of consumers expressed willingness to travel 15-30 minutes for free in-store returns instead of paying a shipping fee.
The Future of E-Commerce: A Focus on Efficiency and Customer Satisfaction
Despite the challenges, the fundamentals of online buying remain strong, with e-commerce sales of cleaning products, groceries, and health/medical supplies demonstrating significant year-over-year growth.
Retailers are focusing on efficiency and customer satisfaction to navigate the evolving landscape. This involves actively managing shipping costs through strategic diversification, adapting to consumer expectations for speed and free delivery, and implementing robust returns management practices.
The relentless pursuit of speed in package delivery is reshaping the retail landscape as we know it. By adapting to changing consumer preferences and proactively managing their own costs, retailers are charting a path toward both profitability and customer satisfaction in this highly dynamic environment.
